Achmad Faizal Azmi (361160)

4-51
A. Calculate the plantwide cost driver rate and use this rate to assign overhead costs to
products. Calculate the gross margin for each product and calculate the total gross
margin.

The plantwide cost driver rate is $122,000/(2,400 + 1,440 + 720

+320) = $25.00 per direct labor hour

Unit gross margin:

A B C D
Selling price $ 15 $ 18 $ 20 $ 22
Materials cost 4 5 6 7
Labor cost 7.2 5.4 3.6 2.4
Overhead 6 4.5 3 2
Total cost 17.2 14.9 12.6 11.4
Gross Margin $ (2.2) $ 3.1 $ 7.4 $ 10.6

Total gross margin:

A B C D Total
Seliing price $ 150,000 $ 144,000 $ 120,000 $ 88,000 $ 502,000
Materials cost 40,000 40,000 36,000 28,000 144,000
Labor cost 72,000 43,200 21,600 9,600 146,400
Overhead 60,000 36,000 18,000 8,000 122,000
Total cost 172,000 119,200 75,600 45,600 412,400
Gross Margin $ (22,000) $ 24,800 $ 44,000 $ 42,400 $ 89,600

b.If any product is unprofitable in part a, drop this product from the mix. Recalculate the cost
driver rate based on the new total direct labor hours remaining in the plant and use this rate to
assign overhead costs to the remaining three products. Calculate the gross margin for each
product and calculate the total gross margin.

After dropping product A, the plantwide cost driver rate is $122,000/(1,440 + 720 +320) =
$49.1935 per direct labor hour

Unit gross margin:

B C D
Selling price $ 18 $ 20 $ 22
Materials cost 5 6 7
Labor cost 5.4 3.6 2.4
Overhead 8.85 5.9 3.94
Total cost 19.25 15.5 13.34
Gross Margin $ (1.25) $ 4.5 $ 8.66
Total gross margin:

B C D Total
Selling price $ 144,000 $ 120,000 $ 88,000 $ 352,000
Material cost 40,000 36,000 28,000 104,000
Labor Cost 43,800 21,600 9,600 74,400
Overhead 70,839 35,419 15,742 122,000
Total cost 154,039 93,019 53, 342 300,400
Gross margin $ (10,039) $ 26,981 $ 34,658 $ 51,600

c. Drop any product that is unprofitable with the revised cost assignment. Repeat the process,
eliminating any unprofitable products at each stage.

After further dropping product B, the plantwide cost driver rate is $122,000/(720 +320) =
$117.3077 per direct labor hour

Unit gross margin:

C D
Selling price $ 20 $ 22
Material cost 6 7
Labor cost 3.6 2.4
Overhead 14.08 9.38
Total cost 23.68 18.78
Gross margin $ (3.68) $ 3.22

Total gross margin:

C D Total
Selling price $ 120,000 $ 88,000 $ 208,000
Material cost 36,000 28,000 64,000
Labor cost 21,600 9,600 31,200
Overhead 84,462 37,538 122,000
Total cost 142,062 75,138 217,200
Gross margin $ (22,062) $ 12,862 $ (9,200)

Now product C appears unprofitable. After further dropping product C, the plantwide cost
driver rate is $122,000/320 = $381.25 per direct labor hour
Unit gross margin for product D:

D
Selling price $ 22
Material cost 7
Labor cost 2.4
Overhead 30.5
Total cost 39.5
 Gross margin $ $17.9

Total gross margin for product D:

D
Selling price $ 88,000
Material cost 28,000
Labor cost 9,600
Overhead 122,000
Total cost 159,600
Gross margin $(71,600)

d. What is happening at Youngsborough and why? How could this situation be avoided?
Youngsborough has faced a complicated situatuon by using planned levels of direct labor hours
in the denominator for the cost driver rates. In Youngsboroughs situation, the capacity-related
overhead costs are fixed. Therefore, dropping unprofitable product A made the cost driver rate
increase, which consequently making product B look unprofitable. This cycle will continue
until Youngsborough had no profitable products anymore. This situation would likely have
been avoided if Youngsborough had used practical capacity direct labor hours in the
denominator for the cost driver rate. The cost driver rate would then have remained unchanged
when the company dropped product A, so the remaining products would appear as profitable
as they were before. However, the company would then have underapplied overhead (idle
capacity costs), and should explore opportunities to use the idle capacity productively, such as
increasing sales of the remaining products or developing new profitable products.